I don't think you understand what styles are intended to do. You should use
styles based on function. When you attach a different template, you can get
different formatting, but the function is the same. A Heading 2 should
always be a second-level subhead regardless of how it looks. At any rate,
Word is not designed to work the way you are trying to use it.

--
Suzanne S. Barnhill
Microsoft MVP (Word)
Words into Type
Fairhope, Alabama USA
Word MVP FAQ site: http://word.mvps.org
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The reason I dont want to modify Word's built in styles is because we
want this template to apply to any of our report documents, and many of
them have different styles for the same header (we have a pretty
standard report format, but the actual formatting varies, mostly due to
manual formatting being applied to each individual report by whoever is
working on it). For instance, in Report A the main header uses the
"Heading 2, Primary" style while the same header in Report B, while
visually looking the same, uses the "Heading 2" style. With my
original thinking, I thought that the new style would replace the old
style because the new style was based on the old style. I realize that
this would obviously pose a big problem when trying to apply this
template to any document other than the "tester" document that I took
the example text from. But if I cant even get the tester document to
work, I am not yet worried about other documents.

So I guess my new question should be: Is there any way (other than
going to Outline view, selecting a certain style, clicking on "select
all", and then changing the style; repeating for each style I want to
change) to create a template with a small set of custom defined styles
that could be attached to any document that has X style being used for
the header or text and have that template overwrite the old styles?
Note: When I first started looking into this, it didn't seem like this
would be possible, as you would have to somehow define what old styles
the new style will replace, and there doesnt seem to be any option to
do that. I have been told that this can work, is there any way this
could be possible?

I will keep your idea of changing Word's built in styles in mind
because that seems to be my only option at this point, although it is
not ideal.